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AKB: Does anyone have experience with HELOCs?

Beachwineguy

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Aug 21, 2008
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Hey all! I’ve just refinanced my home to keep my mortgage payments relatively the same (within $20) and brought the duration of the loan from 28 years down to 20. My wife doesn’t want this to necessarily be our forever home but would like to move into something with an additional bedroom and a pool.

I’ve researched HELOCs and how you can use them to pay off your mortgage in a much shorter amount of time. I have about $100k equity in our home at the moment. I’d like to pay down our mortgage as much as possible to be able to get more money back when we decide to sell. Does anyone else have experience in using these to pay off their mortgage?
 
Either way you still have debt against the sale price of your home , and secured by your equity . Only makes sense to use the HELOC if the interest rate on it is lower than the mortgage . You can always prepay your mortgage or use biweekly payments and shorten the term of the loan to be less than 20 years .
 
The other thing to think about is your HELOC line gives you a relatively inexpensive loan in the event of a financial emergency or need . If you max out the HELOC paying down your mortgage and you have a urgent cash need , well it sounds like it could possibly be SOL.
Without knowing more details , I would prepay the mortgage and denote it as principle , and hold off using the HELOC in case of an urgent need .
 
I have been in the mortgage business for 30 plus years and my group services more than half a million HELOCs. I can answer your questions but first you need to understand what you are asking. A Home Equity Line of Credit is a loan against the existing equity in your property. It is a secured loan meaning an additional lien is placed against your property sometimes called a junior lien as it is subordinate to your first mortgage.

Based on your premise, paying the first down with the second, you would not be gaining any equity only shifting the debt from one loan to the other. You might get a slight interest rate benefit of maybe 25-50 basis points now but most HELOCs float with some index which at some point will go up wiping out that positive differential and going negative to your benefit.

Based on what I just said, what are your questions?
 
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Hey all! I’ve just refinanced my home to keep my mortgage payments relatively the same (within $20) and brought the duration of the loan from 28 years down to 20. My wife doesn’t want this to necessarily be our forever home but would like to move into something with an additional bedroom and a pool.

I’ve researched HELOCs and how you can use them to pay off your mortgage in a much shorter amount of time. I have about $100k equity in our home at the moment. I’d like to pay down our mortgage as much as possible to be able to get more money back when we decide to sell. Does anyone else have experience in using these to pay off their mortgage?
Let's back up. Something isn't right here. How do you think you can use a Home Equity Line of Credit to pay off your mortgage in a much shorter amount of time?
 
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Having debt at the current mortgage rates is not a horrible decision. There’s an emotional factor of having no (or little) mortgage balance, but at the rates today, you can invest the money in other areas while allowing your home to appreciate at the same time. Of course, talk to a financial advisor based on your situation and goals. Or, just pay more monthly on your mortgage to pay it off quicker.
 
Thanks everyone for the feedback! I’ve seen some programs that say “Pay off your mortgage in 5-7 years,” but if it’s just reallocating the debt, then it isn’t really worth it. I’ve been paying extra monthly which ends up being more than an extra mortgage payment per year. I dropped my rate to 2.875% and I don’t think a HELOC will be much better (if any) than that. I just wanted to see if it would be worth using a Heloc to pay down the mortgage quicker and increase equity if we sold our home in the next few years. It seems like just paying extra each month when possible would be the best bet.
 
Thanks everyone for the feedback! I’ve seen some programs that say “Pay off your mortgage in 5-7 years,” but if it’s just reallocating the debt, then it isn’t really worth it. I’ve been paying extra monthly which ends up being more than an extra mortgage payment per year. I dropped my rate to 2.875% and I don’t think a HELOC will be much better (if any) than that. I just wanted to see if it would be worth using a Heloc to pay down the mortgage quicker and increase equity if we sold our home in the next few years. It seems like just paying extra each month when possible would be the best bet.
Glad we could help you. Paying extra each month, called a principal curtailment, is the way to go. Those extra dollars go directly to your principal and will in turn, over time, reduce the length of your mortgage thus saving your interest expense.
 
Each of us has our own reasons for doing things, but recognize that what you’re doing here is forcing yourself to save some money for later. The only problem is it may not be a very efficient way to do so. With rates as low as they are there are some significant reasons to hold higher mortgage debt and for a longer time. You typically expect market returns to be about 2x (or more) these mortgage interest rates over a reasonably long time period, meaning you expect to make money by putting the equity in the market. If you come upon an unfortunate situation where your income drops you can sell some of those liquid assets and use that money to make your payments. Remember any change (increase?) in your home value is yours regardless of how much equity/debt you have in it as long as the bank can’t take your property. As another poster noted, there’s a strong emotional thing people have about having that home equity, but often it’s irrational from a strictly $$ POV.
 
Thanks everyone for the feedback! I’ve seen some programs that say “Pay off your mortgage in 5-7 years,” but if it’s just reallocating the debt, then it isn’t really worth it. I’ve been paying extra monthly which ends up being more than an extra mortgage payment per year. I dropped my rate to 2.875% and I don’t think a HELOC will be much better (if any) than that. I just wanted to see if it would be worth using a Heloc to pay down the mortgage quicker and increase equity if we sold our home in the next few years. It seems like just paying extra each month when possible would be the best bet.

I agree with the advice you received here. Using a HELOC to pay down your mortgage is kinda' like this guy...

:)

 
The other thing to think about is your HELOC line gives you a relatively inexpensive loan in the event of a financial emergency or need . If you max out the HELOC paying down your mortgage and you have a urgent cash need , well it sounds like it could possibly be SOL.
Without knowing more details , I would prepay the mortgage and denote it as principle , and hold off using the HELOC in case of an urgent need .
Agreed...the Cautionary tale is that people often get a HELOC to pay off an high interest Credit Card which is great. the problem is that they just go and max out their cards again resulting them being double in debt.

The end game is that the borrower is still subject to foreclosure if the debts aren't paid. And that is why mortgages and HELOCs are lower interest rates: they are secured by the value of the home for the lender.
 
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Agreed...the Cautionary tale is that people often get a HELOC to pay off an high interest Credit Card which is great. the problem is that they just go and max out their cards again resulting them being double in debt.

The end game is that the borrower is still subject to foreclosure if the debts aren't paid. And that is why mortgages and HELOCs are lower interest rates: they are secured by the value of the home for the lender.
Sort of accurate. Mortgages and HELOC's have lower rates because they are lower risk due to much more extensive underwriting criteria than an auto loan or a credit card. The higher risk drives the higher rate. Yes, the secured aspect is a factor, but frankly, no lender wants to go that route to foreclose unless it is the last resort. Loss Mitigation has changed dramatically in the last 10 or so years.

As for paying off credit cards with a HELOC, it is a very stupid thing to do. You should never, never, convert unsecured debt into secured debt. That unpaid credit card which may result in your credit looking bad, a charge off or possibly getting sued for the unpaids is not nearly as bad as putting your home at risk for an unpaid credit card.
 
Hey all! I’ve just refinanced my home to keep my mortgage payments relatively the same (within $20) and brought the duration of the loan from 28 years down to 20. My wife doesn’t want this to necessarily be our forever home but would like to move into something with an additional bedroom and a pool.

I’ve researched HELOCs and how you can use them to pay off your mortgage in a much shorter amount of time. I have about $100k equity in our home at the moment. I’d like to pay down our mortgage as much as possible to be able to get more money back when we decide to sell. Does anyone else have experience in using these to pay off their mortgage?

This sounds like the loan product you're actually describing. A previous lender tried to sell me this "All-in-One" mortgage product but it was not a good fit for me as a retiree, and even if it was I still didn't like it. I was told that type of product is popular in other countries.

 
Home values are increasing a lot right now which will help you build equity in your current home but make your next purchase more expensive. I’m of the opinion of paying down your current mortgage over a 15 year period is the way to go just to give you the peace of mind of being debt free. I wouldn’t count on the stock market remaining high. We’re due for a correction.
 
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I know virtually nothing about this except I had a HELOC once. Two things I've heard. 1. Have an exit strategy if interest rates move up. 2 If possible, have your entire check deposited into your heloc and write checks against the HELOC. It only works if you spend less than a certain amount/ percentage of your paychecks. IIRC that is the part that gets you paydown the principle quickly.

If you need most of your check to live, I don't think this would be for you. Maybe the Math guys can chime in.
 
This sounds like the loan product you're actually describing. A previous lender tried to sell me this "All-in-One" mortgage product but it was not a good fit for me as a retiree, and even if it was I still didn't like it. I was told that type of product is popular in other countries.

Oops! Just saw this.
 
This sounds like the loan product you're actually describing. A previous lender tried to sell me this "All-in-One" mortgage product but it was not a good fit for me as a retiree, and even if it was I still didn't like it. I was told that type of product is popular in other countries.

This product is an equity time bomb. I don't know if this thing is being sold in the US but I would expect the OCC and CFPB would have a field day with it. I can't imagine what the loan disclosures look like for this POS.
 
This product is an equity time bomb. I don't know if this thing is being sold in the US but I would expect the OCC and CFPB would have a field day with it. I can't imagine what the loan disclosures look like for this POS.

It currently shows up on this lender's website, you can find others online.

 
Home values are increasing a lot right now which will help you build equity in your current home but make your next purchase more expensive. I’m of the opinion of paying down your current mortgage over a 15 year period is the way to go just to give you the peace of mind of being debt free. I wouldn’t count on the stock market remaining high. We’re due for a correction.
The other point is there WILL be a real estate dip at some point, and it would suck to be underwater, negative net value.
 
The other point is there WILL be a real estate dip at some point, and it would suck to be underwater, negative net value.
This may be a dumb question but what’s the harm in being underwater if it’s your forever home and the payments are affordable?
 
This may be a dumb question but what’s the harm in being underwater if it’s your forever home and the payments are affordable?
He stated it is not HIS forever home . Really IMO, no debt including mortgage debt is a good thing. This is especially true as you get north of 50. If you are somewhat certain your home value is going to increase it is palatable. However with current valuations, certainly a greater chance of a pull back in the market than further appreciation.Disability or loss of a job can always happen.
 
Sort of accurate. Mortgages and HELOC's have lower rates because they are lower risk due to much more extensive underwriting criteria than an auto loan or a credit card. The higher risk drives the higher rate. Yes, the secured aspect is a factor, but frankly, no lender wants to go that route to foreclose unless it is the last resort. Loss Mitigation has changed dramatically in the last 10 or so years.

As for paying off credit cards with a HELOC, it is a very stupid thing to do. You should never, never, convert unsecured debt into secured debt. That unpaid credit card which may result in your credit looking bad, a charge off or possibly getting sued for the unpaids is not nearly as bad as putting your home at risk for an unpaid credit card.

You kind of missed a big driver of rates for mortgages. Those tiny companies called Fannie Mae and Freddie Mac.

LdN
 
You kind of missed a big driver of rates for mortgages. Those tiny companies called Fannie Mae and Freddie Mac.

LdN
Fannie and Freddie set the underwriting guidelines. They set their rates on the 10 year note. I’m well aware of them. I have sat on operating boards at both over the years.
 
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